You need a plan to insure your income meets your needs.
Making the leap from deciding to take retirement income to putting that decision into action can be nerve-wracking. That’s because the choices you make can mean a major difference in the way you live — sometimes for 30 years or more. And putting off decisions often seems easier than making them.
Realistically, though, you improve your chances of achieving the best results when you determine the income you’ll need, weigh various ways it can be provided, and select the approach that seems likely to best meet your needs.
What the issues are?
To make a strategic decision about the method you select to take income from your deferred or immediate annuity, it’s smart to begin by analyzing what portion of your overall retirement income the annuity will provide. That makes it easier to determine:
- Your plans for the annuity income
- The right time to start taking that income
- The tax consequences of various ways of receiving the income
- How long you want the income to last
You may need more income early in your retirement than you will later on. And you may be more comfortable spending money on travel, for example, if you’ve deliberately created a stream of income designed to pay for it.
To be sure you have the money you want when you want it, you might ask your annuity provider about personalized payout plans or innovative programs for allocating your income. One strategy is to split your variable annuity payout into two streams, one to be paid out over your and your spouse’s lifetimes and the other to be paid over five or ten years. For example, suppose you had a $300,000 annuity and allocated 75% ($225,000) to life income and 25% ($75,000) to a ten-year payout.
The amount you received during the shorter payout — perhaps $7,500 or more annually — could be used toward extended travel or other things you’ve wanted to do. And since you’d planned the income specifically for that purpose, you could spend it with a clear conscience. At the same time, you’d be guaranteed income for life, based on the balance of the contract value and the insurer’s ability to pay.
Plans for the money
The way you plan to use the money is often the key factor in choosing a payout method. So you should be aware of the advantages and drawbacks of your alternatives.
If you plan to make a large, one-time investment in the short term, you may decide that taking a full or partial lump sum withdrawal is preferable to choosing a life payout. You’ll want to check your contract to see if there’s a penalty or an extra fee if you choose not to convert the account value to a stream of income.
If you expect to use the extra income to supplement your budget or cover extraordinary expenses before you retire, periodic or systematic withdrawals may be the method you prefer. Systematic withdrawals let you receive income from the accumulated value of your contract on a regular schedule. You can adjust the amount or timing of the payments by notifying the company. Any earnings on amounts that remain in your account continue to accumulate tax deferred. But the income may not last for your lifetime.
Or, you can annuitize and convert your account value to a stream of income.
Setting the time
There are some timing restrictions on withdrawing from a deferred annuity. Usually there’s a 10% penalty if you take income before you turn 59½.
If your deferred annuity is part of a qualified plan or an IRA, you generally have to start by the time you reach 70½. With nonqualified annuities, you’ve usually got another fifteen years or more before you must make a decision.
You can make an argument for postponing taking income until the last minute, especially if you seem to be managing without it. Then, when you do start, the amount you receive will be larger. For example, in some circumstances a person who begins taking income at 85 might receive almost twice the amount in the initial payment as someone who began at 62.
But there are often reasons for timing annuity payouts to begin when you retire, or even somewhat earlier. Annuities are designed to provide income for you, not to be left to your heirs — who may end up paying more in taxes than you would on the same income.
Creating a revenue stream
If you decide that the promise of income for life and the advantages of a regular return of nontaxable premiums as part of each income payment make sense for you, it’s time for the next round of choices. The order in which you deal with them may vary, but these are the things you have to consider:
- Is the growth potential of variable income more important to your long-term plan than the predictability of stable fixed income?
- Would you prefer to have some variable income and some fixed income?
- If you choose variable income, which benchmark rate of return should you select, provided your annuity company provides a choice of rates?
Since there’s no way to be sure how long you’ll live and need income, one approach is to make plans for five-year segments. That’s long enough to see the effect of taking income from various sources during changing economic cycles. But it’s short enough to catch potential problems and make adjustments in your spending style. This approach works well if you have the security of lifetime income for your basic needs.
Are Annuities Good For Retirement Income? by Inna Rosputnia
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